Dollar Losing The Rule Of World Currency?

Dollar role casts shadow over G8 summitExplore related topics
Banks Story Quotes Comments Screener (39) Alert Email Print By William L. Watts, MarketWatch

LONDON (MarketWatch) -- Questions about the dollar's role as the world's primary reserve currency won't go away as leaders of the Group of Eight nations prepare to begin a three-day meeting in Italy on Wednesday.

The issue isn't on the agenda for G8 leaders, but officials from Russia and elsewhere have said it will be discussed when the G8 heads are joined Thursday by the leaders of emerging economies, including China, India and Brazil.

The G8 consists of the United States, Japan, Germany, France, Italy, Great Britain, Canada and Russia.

China, the largest holder of dollar-denominated reserves, and Russia have repeatedly voiced concerns since the beginning of the year over the world economy's reliance on the dollar. China and others have argued in favor of creating an alternative based on the International Monetary Fund's special drawing rights.

The G8 won't discuss the reserve currency issue, but "China and Russia will state their stance that the global currency system needs smooth evolutionary development and this is connected with the creation of several regional reserve currencies, which may then become international," Kremlin aide Arkady Dvorkovich said ahead of the meetings, according to Reuters.

But some currency watchers say recent remarks by Chinese officials and others indicate that concerns about a fall in the dollar, which would be self-defeating for countries holding large dollar reserves, could serve to squelch questions about the dollar's reserve status in the near term.

"There seems to be a recognition among a growing number of administrations that it would be better to avoid a fresh slide in the U.S. dollar from here," said Simon Derrick, chief currency strategist at Bank of New York Mellon, in a research note.

On Monday, German Finance Minister Peer Steinbrueck expressed doubts that the dollar's reserve role would come under threat even though rival currencies will likely grow in influence.

"I don't think it's very probable that the U.S. dollar will lose its role as the leading reserve currency world-wide," Steinbrueck said at a meeting of European finance ministers in Brussels, The Wall Street Journal reported.

Kenneth Broux, market economist at Lloyds TSB, said the dollar will likely be discussed on the sidelines of the summit, but remains skeptical that any major changes in the dollar's reserve status will be coming soon.

He noted recent IMF data showed the dollar's share of the world's roughly $4 trillion of foreign exchange reserves actually grew to 64.9% in the first quarter of the year, up from 64% in the final three months of 2008. That indicates complaints about the dollar's role represent "more talk than action," he said.

First Obama G8
The meeting marks U.S. President Barack Obama's first G8 summit. Leaders will meet against the ruined backdrop of L'Aquila, the mountain city shattered by a massive earthquake earlier this year that left around 300 dead.

"I think they're going to pat themselves on the back," said Roger Kubarych, chief U.S. economist at UniCredit Global Research in New York.

Since the depths of the financial crisis last fall and steep declines in output in the first quarter of this year, the economy appears "more stable, adjustments are under way, and there are no glaring imbalances that require fixes beyond what they already agreed to do," he said.

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